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As strong data has hit the market, a number of sectors have
moved higher in the U.S. in response. While highly cyclical sectors
have led the way for the most part, real estate has also added to
recent gains. The sector that was nearly decimated during the
financial crisis has been on a tear as of late, thanks to positive
data points on both the home construction and general business
sentiment fronts. Thanks to these factors and the superb yields
that are in many funds in this space, it may be time to cautiously
cycle back into the REIT sector, especially if current market
trends continue (see
Three Cyclical ETFs that Are Surging Higher
).

Yet, investors should also note that while all real estate ETFs
have jumped higher this year, small caps have led the way on the
upside. These funds were beaten down more than their large and mid
cap focused counterparts in years past and appear to be storming
back in recent months. In fact, the two small cap focused real
estate ETFs have outperformed the larger ETFs in the space-such as
IYR
,
VNQ
, or
RWR
-by as much as 400 basis points since the start of 2012. Given this
trend of outperformance by the small caps, those who are looking
for real estate exposure could be better served by considering this
segment for their portfolios (read
Three Outperforming Active ETFs
).

While two funds exist in this corner of the market, they are by
no means identical. In fact, there are a number of differences
between the two small cap focused real estate ETFs. Thanks to this,
investors intrigued by the broad trends in the real estate market,
but are looking to make a play on small caps specifically, should
consider the breakdown of the two funds below:

This ETF tracks the KBW Premium Yield Equity REIT Index which
follows roughly 30 REITs that are traded in the U.S. The index uses
a dividend yield weighting methodology and only focuses in on small
and mid caps for its holdings. With this focus, close to 85% of the
total assets are in small caps with top holdings going to
Getty Realty Corp (
GTY
)
,
CommonWealth REIT (
CWH
),
and
Cedar Realty Trust (
CDR
)
. In terms of sectors, retail takes the top spot at about 31%,
although specialized (26.2%), and office REITs also make up double
digit weightings as well. KBWY charges investors 35 basis points a
year in fees and pays out a pretty solid 6% in 30 Day SEC Yield
terms, suggesting that it could be a decent source of income as
well. Beyond this, the fund has also added about 10.8% in
year-to-date terms, crushing the 6.4% performance of VNQ in the
same time period (read
Three Construction ETFs For An Economic
Recovery
).

For another option in the small cap REIT space, investors should
look to IndexIQ's ROOF. The product tracks 42 companies while
charging investors 69 basis points a year in fees for its services.
The product also has a good level of diversification among its
sector holdings as mortgage REITs make up about one-fourth of the
total, but are closely trailed by Office REITs (19.2%), and
Specialized REITs (15.2%) to round out the top three. Thanks to
this, the fund looks unlikely to be impacted by a downturn in any
one segment and could act as a broad barometer for the small cap
space. However, investors should note that the product has slightly
underperformed KBWY so far this year, gaining 10.6% in the time
period. With that being said, the annual dividend yield for ROOF
comes in at about 6.5% while the index yield according to the
recent fact sheet is 7.5%. Given these figures, ROOF may be able to
make up some of its underperformance and higher expenses in the
eyes of yield focused investors as its payouts look to be highly
competitive with its counterpart from PowerShares (read
Three Industrial ETFs For A Manufacturing
Revival
).

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